Avoidance Application Cannot Be Adjudicated By NCLT After Approval Of Resolution Plan: Delhi High Court

The Delhi High Court has held that an application for avoidance of a preferential transaction, though filed prior to the Resolution Plan being approved, cannot be heard and adjudicated by the NCLT, at the instance of the Resolution Professional, after the approval of the Resolution Plan.

The continuation of a RP or filing of an application for the purpose of prosecuting an avoidance application as a `Former RP' is beyond the contemplation of the Insolvency and Bankruptcy Code, Justice Prathiba M. Singh observed.

In this case, the NCLT had issued notice an application filed under Section 43 for avoidance of preferential transactions of the resolution process which was filed before it approved the resolution plan.  Assailing this proceedings, the petitioner's contention was that under the scheme of the IBC, once the CIRP has reached finality, the Resolution Professional (RP) becomes functus officio and can no longer file or pursue any application on behalf of the company.

As per Section 43 of the code, if the RP is of the opinion that any preferential transaction has taken place, by which the Corporate Debtor has given any benefit to a related party, two years prior to the insolvency commencement date or a preference to an unrelated party one year prior to the said date, he can move an application with the NCLT for avoidance of the same. If the NCLT is of the view that the transaction was a preferential transaction, it can pass various types of orders as set out in Section 44, in effect neutralising the transaction.

The court considered the following issues in the writ petition: i. Whether a RP can continue to act beyond the approval of the Resolution Plan? ii. Whether an avoidance application can be heard and adjudicated after the approval of the Resolution Plan? iii. Who would get the benefit of an adjudication of the avoidance application after the approval of the Resolution Plan.

Referring to the provisions of the code, the bench said that an avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor and the benefit is not meant for the Corporate Debtor in its new avatar, after the approval of the Resolution Plan. The court said:

"Moreover, an RP cannot continue to file applications in an indefinite manner even after the approval of a Resolution Plan under Section 31. The role of a RP is finite in nature. He or she cannot continue to act on behalf of the Corporate Debtor once the Plan is approved and the new management takes over. To continue as RP indefinitely even beyond the approval of the Resolution Plan would be contrary to the purpose and intent behind appointment of a RP. The Resolution Professional (RP), as the name itself suggests has to be a person who would enable the resolution. The role of the RP is not adjudicatory but administrative in nature. Thus, the RP cannot continue beyond an order under Section 31 of the IBC, as the CIRP comes to an end with a successful Resolution Plan having been approved. This is however subject to any clause in the Resolution Plan to the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan. In the present case, no such clause has been shown to exist."

"There is a START line and FINISH line for the Resolution process. Section 23 clearly stipulates that the role of the RP is to `manage' the affairs of the Corporate Debtor `during' the resolution process and NOT thereafter. In fact, until the enactment of the proviso to Section 23, which was introduced with effect from 28th December, 2019, the RP's mandate concluded with the CIRP. The proviso introduced, firstly in 2018 and thereafter in 2020, merely extended the mandate of the RP till the approval of the Resolution Plan under Section 31(1) or appointment of liquidator under Section 34. This itself makes it amply clear that the RP's authority is limited in nature and in any event, cannot extend beyond the order passed under Section 31. Thus, there is an outer limit for the functioning of the RP under the proviso to Section 23(1). The continuation of a RP or filing of an application for the purpose of prosecuting an avoidance application as a `Former RP' is beyond the contemplation of the IBC. The RP ceases to be one after an order under Section 31 is passed. The RP does not have any connection whatsoever with the new Management which takes over the erstwhile Corporate Debtor, after the approval of the Resolution Plan. Any other interpretation could lead to a situation where an RP could be a 'Former RP' for years together without any definite end date. Under Section 23, the CIRP period is a specific period and cannot be read as a perpetual period or an indefinite period. The wording of the proviso in fact W.P.(C) 8705/2019 Page 34 of 40 makes it further clear that the CIRP process in fact comes to an end immediately upon the RP submitting the Plan itself."

The court said that after the Resolution Plan is approved and the new management takes over, the manner in which the affairs of the company are to be run is the sole prerogative of the new management. While setting aside the NCLT order, the court said:

"In the statutory scheme, the RP cannot continue to act on behalf of the Company under the title of `Former RP'. That would be violative of the legislative intention and the statutory prescription. Their continuation beyond the closure of the resolution process would in effect mean an interference in the conduct and management of the company, which is now having its own independent Board, managerial personnel, etc. The RP's role cannot continue once the Resolution Plan is approved and the successful Resolution Applicant takes charge of the Corporate Debtor."

CASE: VENUS RECRUITERS PRIVATE LIMITED vs. UNION OF INDIA [W.P.(C) 8705/2019]
CORAM: Justice Prathiba M. Singh
COUNSEL: Sr. Adv Kapil Sibal, CGSC Anurag Ahluwalia,  Adv Vijayendra Pratap Singh, Adv Abhinav Vasisht

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